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Implications of Airtel Payments Bank’s decision to not issue debit cards

Airtel Payments Bank will not be issuing physical debit cards for account holders, Shashi Arora, managing director and CEO, said in an interview with Moneycontrol. However, readers need to note that the payments bank has partnered with card network MasterCard where customers will be given a virtual card which will be linked to the savings bank account so that customers can make payments across all online merchants.

Payments banks are allowed to issue debit cards and Airtel’s decision to not issue them is a curious one. There are currently over 700 million debit cards in circulation and is the second largest payment instrument in circulation after cash. However, as the Reserve Bank of India noted, debit cards are primarily being used at ATMs to withdraw cash.

It looks like Airtel Payments Bank is looking to be a truly digital bank and is looking to avoid cash as much as possible. In fact, it is also charging customers on cash withdrawals.

Cash, however, has demonstrated to be an exceptional instrument in terms of being interoperable, understandable and instant settlement. Plus, the Airtel Payments Bank app needs to be accessed via a smartphone app which needs to be charged and with an Internet connection.

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Cash, on the other hand, doesn’t need any of that and is simple enough for everyone to understand. Airtel will have to significantly educate customers about digital money for being a digital bank.

Interconnection is costly

However, Airtel Payments Bank’s decision to not issue debit cards is understandable. Considering consumer behaviour, where debit cards are primarily used to withdraw cash, Airtel will have to pay significant amount in terms interconnection charges to existing commercial banks to use their ATMs. The cost of an ATM transaction is around Rs 20 and customers in metro cities are charged this amount after five transactions by commercial banks.

Even for POS payments, merchants are charged an interbank exchange fee called Merchant Discount Rate (MDR) of 2.5-1.8%. Following the demonetization of Rs 500 and Rs 1000 notes, merchants are now unwilling to pay such a high MDR on transactions as shown by the recent standoff between banks and petrol pumps. Convincing merchants to install a machine to accept debit card payments will be a challenge that the new payments bank will try to avoid.

Remember, payments banks are not allowed to give out any loans or issue credit cards. As such, Airtel will have to find new avenues of revenue and control costs.

UPI payments

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Arora further added that the payments bank will be getting on the Unified Payments Interface (UPI) in the coming days without specifying a timeline. This would significantly help when customers need to make person-to-person payments to people who are on other commercial banks. However, it is unclear if payments bank will be allowed on the UPI platform (the UPI was developed by the NPCI, a bank-led organization, and there has been friction in terms of interconnection). That’s where the tie-up with Kotak Mahindra Bank would perhaps be useful where Airtel Payments Bank could ride on the UPI rails.

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